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CenterPoint Energy: Investors Have Nothing To Fear

Summary The stock continued to decline after Q3. Equity investment write-down doesn’t reflect the investment’s true value. Results from core operations improved from last year. The market continues to be bearish about CenterPoint Energy (NYSE: CNP ). Given the company’s performance in 2015, it would seem that investors are doubting the stability of the utility company. After falling 20% from $23.43 at the beginning of the year to $18.68 before Q3 earnings, shares have since dropped another 8% to $17.10. Do the fundamentals support this rapid decline? Revenue continued to fall. Following Q2’s 19% drop, Q3 revenue decreased by 10% ($1.8 billion to $1.6 billion) as well, primarily as the result of lowering natural gas prices. However, this was offset by the drop in natural gas expense, which decreased from $702 million to $527 million. Due to various cost reductions, the company was able to decrease its operating expense from $493 million to $479 million. This impact may seem small, but this allowed the company to increase its operating income by 14% when compared to Q3 2014. This rise in operating profit is the first time the company achieved growth in 2015. Q1 and Q2 operating profit decreased by 13% quarter on quarter, and Q3 operating profit was flat. Isn’t this evidence that the company is improving? What are investors worried about? Possible Concern One thing that could trouble investors is the loss from equity investment ($794 million), which is the biggest reason that the company delivered a $900 million loss before taxes. The equity investment consisted solely of Enable Midstream (NYSE: ENBL ), a stock that I’ve talked about before. You can read my previous articles ( here and here ) to learn more about the company. Enable Midstream Partners is a midstream company that is suffering from industry headwinds. However, the company continues to deliver good cash flows due to its fee-based contracts. Furthermore, it is well capitalized with a good interest rate coverage ratio. Enable’s transported volume continued to grow in Q3, offsetting declining prices that negatively impacted product sales. Going forward, I believe Enable will come out on top even if natural gas prices don’t improve. What does all of this mean? I believe that the write-off of equity investment is not representative of Enable Midstream Partners’ true value. Core Operation Remains Stable Enough about Enable, what about CenterPoint’s existing operation? In my last article , I talked about the company’s stability. The Electric segment is not directly affected by commodity movements since it is not involved in power generation activities. The Natural Gas Distribution segment does have some exposure to commodity movements due to a time lag between purchases and deliveries, but the company actively uses derivatives to hedge any uncertainty. So overall, I would expect profit to be stable over the long term. CenterPoint’s stability is once again evident in Q3. Every single segment improved quarter on quarter. Operating income for the Electric segment rose 5%, Natural Gas Distribution’s operating income recovered from last year’s volatility, improving from a loss of -$8 million to a gain of $11 million, and Energy Services’ operating income increased by 17%. Takeaway I believe there’s nothing in the third quarter that was particularly alarming. The company continued to deliver stable profits amid a volatile commodity environment. Unfortunately, investors have been focusing on the wrong things. In particular, the Enable Midstream fear is overblown. Results from core operations should continue to improve, and that is what will really support the company as a whole.

El Paso Electric: The Best Of Both Worlds

El Paso Electric Company has grown its renewable energy portfolio to a well-crafted portfolio aligned with EPA expectations. A high dividend yield with the potential for even higher yields later on give investors a fat dividend check to look forward to. Investors should consider El Paso Electric Company for a two-pronged investment in capital appreciation and capital preservation. After the recent poor performances in the overall stock market, investors are pining for higher returns. But before they run away from the stock market and look for higher returns, they should consider investing in small cap companies in the stock market. As a whole, small cap companies have generated higher returns than mid cap companies or large cap companies, and they have also outmatched various passive indices in return on investment generation as well. This is simply due to the fact that small cap companies have more room for growth than mid or large cap companies, and therefore this extra growth can generate higher returns for investors. Of course, this growth comes with its risks as well. Small cap companies are more likely to go belly up, which is why investors need some method of mitigating the risk involved with investing in small cap companies. One way investors can reduce the risk of investing in small cap companies is through the investing in small cap companies in stable industries. These industries can include industries such as utilities or industrials, given the inelastic demand and high diversification of these industries. The stability of these industries combine with the growth of small cap companies to yield a unique blend of risk and reward. Both capital preservation and capital appreciation are given by this mix, not to mention the steady quarterly paycheck that comes from dividend payouts. One such firms that offers this unique blend is the El Paso Electric Company (NYSE: EE ), a small cap utilities firm engaged in the generation, transmission, and distribution of electricity to a variety of customers in Texas and New Mexico. The Company owns several generation facilities, and it primarily distributes electricity to retail customers. The Company’s ownership interests in these generation facilities provide the Company with a unique blend of investments in various submarkets within the utilities industry, such as nuclear power, natural gas, and other areas of energy. Thus, the Company is well-diversified, providing investors with additional stability. Investors certainly should be pleased with how the Company has done over the years. Capital invested at the onset of calendar year 2011 would have generated a return on investment of about 70% over the course of five years. Although the overall rate of growth is a little slow, the Company’s stock has done nothing but grow steadily over this time period, essentially exchanging rapid, volatile growth for stable growth. Recently, the Company’s shares have begun to trade somewhat sideways as a result of macro instability in the emerging markets, which has affected not just the Company but the overall stock market as well; thus, this stagnation is not Company-specific. From a technical perspective, the 50-day moving average has danced around the 200-day moving average, but both indicators have moved in the positive direction for the past five years in a general manner. Most recently, the 50-day moving average has risen above the 200-day moving average, which could indicate near-term upside as the spread between these two indicators continues to rise. (click to enlarge) Source: Stockcharts.com But it’s not just the technicals that are painting a pretty picture. The Company’s fundamentals are fairly outstanding as well. With a dividend yield of about 3.2%, investors are having the opportunity of substantial capital appreciation (because the Company is a small cap company) as well as the opportunity for a stable, fat dividend check. In fact, the Company plans on growing this dividend yield to about 4 – 6% in the long-term, so investors could see their dividend checks swell even more. Besides this enormous dividend yield (given the Company’s size) and the opportunity for further dividend yield expansion, the Company also has fundamentals that indicate future long-term growth for the Company. In particular, the Company’s energy portfolio will consist of nuclear power, natural gas, and other renewable energy sources. As a result, the Company’s energy portfolio aligns with the interests of the EPA Clean Power Plan (CPP), which could benefit the Company in the long-term if it decides to either keep or grow this particular part of its energy portfolio. Furthermore, while top-line growth and margins have been relatively stagnant, what’s important to keep in mind is the Company’s retained earnings balance, which has steadily risen over the past several fiscal years. The rising retained earnings balance will help buffer dividend payouts, and it will help management reach its goal of a 4 – 6% dividend yield. Overall, we have a small cap utilities company with an extremely high dividend yield and an energy portfolio in-line with what the EPA wants. Investors should consider El Paso Electric Company for a two-pronged investment in capital appreciation and capital preservation.